Results Review

• HIL Industries Bhd’s (HIL) 4Q2018 net profit jumped 94.0% Y.o.Y to RM6.8 mln, compared to RM3.5 mln a year ago, mainly due to stronger margins from higher property sales. Revenue also gained 21.7% Y.o.Y to RM35.7 mln, from RM29.3 mln in the same period in 2017.

• Consequently, full-year net profit grew 26.4% Y.o.Y to RM4.4 mln, from RM3.5 mln last year – led by improvements in both its property and manufacturing segments. Revenue, however, only moved incrementally higher to RM105.4 mln (+3.2% Y.o.Y), from RM102.2 mln in 2017. On the back of its stellar performance, the group has also proposed a first and final single tier dividend of 1.75 sen per share, payable at a date to be fixed later.

• We were pleasantly surprised that the net profit and revenue outperformed our expectations, accounting to 120.6% of our previous full year net profit estimate of RM14.1 mln, while revenue came in at 106.4% of our forecast turnover of RM99.1 mln. The unexpected results were mainly due to higher progress billings from the property segment in the fourth quarter and lower-than-expected depreciation charges.

• Segmentally, improved floor efficiency and lower forex loss drove the turnaround in its full year manufacturing EBIT to RM0.2 mln vs. a loss of RM4.2 mln in 2017, while the property segment also recognized higher contributions from newly launched projects last year.

Prospects

The group has secured new orders for Perodua’s new SUV Perodua Aruz, in addition to Perodua MYVI (new generation). Although the orders for the former are small at the current juncture, we are positive on HIL’s ability to secure more orders for the SUV in the future, in-view of the positive feedback from the mass market.

Perodua is expected to sell an average of 2,500 units of Perodua Aruz per month. The homegrown car manufacturer also recorded car sales of more than 20,000 units in January, with about 5.1% of the sales attributed to Perodua Aruz.

Meanwhile, the profitability outlook for its manufacturing segment appears to be strengthening, following a turnaround in manufacturing EBIT at RM0.2 mln, compared to a loss of RM4.2 mln previously. The group has attributed the improved performance to lower forex losses and increased production efficiency in the segment. Moving forward, we will continue to monitor if the recovery is sustainable should forex movement starts to normalise.

Meanwhile, the local property outlook remains difficult in 2019 as consumers put-off big-ticket spending amid the global and domestic economic slowdown as well as persisting difficulties in securing mortgage loans. On the positive side, the government has launched several initiatives including the property crowdfunding platform which aims to help prospective homeowners to secure funding, although significant changes are unlikely to materialise in the short-term.

Valuation and Recommendation

We increased our FY19 forecast net profit and revenue by 28.8% and 9.4% to RM22.8 mln and RM128.1 mln respectively, taking cue from the upbeat 2018 earnings. The increase will be driven by slightly higher recognition of property sales from its new launches, namely Kemuning 108, Amverton Greens and Amverton Links, as well as higher orders from Perodua (for Myvi and Aruz).

Even so, we reiterate our HOLD recommendation on HIL Industries Bhd with an unchanged target price of RM0.70 due to still persistently weak property landscape in Malaysia. As the majority of the bottomline margin is dependent on the performance of the property segment, we concur that more evidence of a solid recovery is needed before we can justify an upgrade to HIL’s share recommendation.

Our target price is based on sum-of-parts (SOP) approach with an unchanged target PER of 9.0x to its 2019 manufacturing business and a discount of 50% (unchanged) to the revalued net asset value (RNAV) estimate of HIL’s property unit.

Source: Mplus Research - 27 Feb 2019